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Pay in lieu of notice - taxable or not?

Unfortunately pay in lieu of notice is frequently a problem area for tax. HMRC often claims it as taxable while businesses and employees believe it to be tax free.

There are two areas to consider in this:

  • contractual pay in lieu of notice is treated as normal earnings and subject to PAYE and NI. Make sure, therefore, that employment contracts do not state you can pay an employee instead of giving them notice
  • custom – in HMRC’s view even if pay in lieu of notice is not formally contracted for, if you habitually pay it then it is taxable. Make sure you do not fall into the trap of always giving pay in lieu as an 'easy' option.

Cathy Corns is a tax adviser and a partner at Mercer & Hole. The views given in this blog are personal to the author, if you would like to discuss the contents of this blog with Cathy you can call her on 01908 605552.



Date: 30th October, 2009
Author: Cathy Corns


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